Trading position (short-term; S&P 500 futures; our opinion): long positions (100% position size) with stop-loss at 3140 and initial upside target at 3550 are justified from the risk-reward perspective.
Trump's corona-positive test rattled the markets, bringing about sell-off across many assets, including stocks. After yesterday's trading in a tight range, the S&P 500 has quite moved in today's premarket session. Is this the start of a new downleg?
I this it's an exaggerated reaction - the President is feeling fine, not showing any symptoms, and has likely been taking hydroxychloroquine for quite some time. I look for this storm in a tea cup to blow over sooner rather than later.
Such were my yesterday's take on the stock prospects:
(...) The daily indicators support the upswing to go on, and taking part in the unfolding stock move higher, is a question of risk-reward setup preferences.
What about today's non-farm payrolls, won't they disappoint? I think they'll show the tepid pace of the economic recovery perhaps just as much yesterday's ISM manufacturing. On the bright side, Wednesday's Chicago PMI strongly overcame expectations - that's good, because this is a leading indicator that we'll see reflected in upcoming manufacturing and other data. Tuesday's Conference Board consumer confidence came in similarly strongly, and while well below the pre-pandemic levels, it's supporting the story of the unfolding economic recovery.
Given the no stimulus bill through Congress yet, that's quite encouraging if you ask me. Do the charts agree with the generally bullish interpretation for the short- and medium-term?
S&P 500 in the Short-Run
I'll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):
The S&P 500 consolidated recently gained ground yesterday, and the daily volume didn't send a message either way. But the longer such trading goes on, and the better the bulls are able to recover from setbacks, the stronger the launching pad for the next leg higher.
This is in line with my yesterday's thoughts on what's next:
(...) The bears can make another stand at the Feb highs, which correspond to yesterday's highs too - but I am not counting on that as I see base building at these levels as a more probable scenario.
The Credit Markets' Point of View
Both leading credit market ratios - high yield corporate bonds to short-term Treasuries (HYG:SHY) and investment grade corporate bonds to longer-dated Treasuries (LQD:IEI) - are still acting constructive, and the daily leadership baton went from HYG:SHY to LQD:IEI yesterday.
Looks like a normal event to me, with nothing pointing to the start of a risk-off daily string. And Treasuries concur.
Long-term Treasuries (TLT ETF) haven't caught fire during the September storms, pointing to the temporary nature of lower stock prices. In the latter part of September, yields have risen again, lending credibility to the economic recovery story. That's quite in line with the economic indicators data I discussed in the opening part of today's analysis. As the dollar tellingly hasn't swung higher yesterday, both factors are leaning bullish for stocks.
Copper and S&P 500 Sectoral Heavyweights
The red metal truly plunged yesterday, and on heavy volume. Sure, it was vulnerable to a takedown following the rebound off its 50-day moving average, but the slide looks a bit overdone. Certainly, it doesn't invalidate the bullish chart posture as copper stands to capitalize on the electric cars fever and the like it or not rush into green economy in general. The setback suffered will thus be reversed relatively shortly in my opinion.
Technology (XLK ETF) upswing goes on but some digestion of recent gains appears likely. But as I said yesterday, tech is growing in strength vs. the other S&P 500 sectors again.
Healthcare (XLV ETF) is slowly but surely adding to its gains, and the chart doesn't hint at much more than temporary downside.
Financials (XLF ETF) continue their price recovery, yet have quite a way to go to capture both the 50- and 200-day moving averages again. While they are an underperforming sector that in a way questions the S&P 500 upswing from the March lows, it's my opinion that they'll catch up over the weeks and especially months to come.
From the Readers' Mailbag
Q: What do you think about investing in individual stocks compared to investing in EFTs with equal research performed of course.
A: I've answered a similar question in my September 03 top calling article Wasn't Yesterday's Strong S&P 500 Day a Bit Climactic? Quoting the relevant part:
(...) Stock picking can be extremely profitable but a dud too - far from all the picks are tenbaggers. You're still exposed to company risk (the quality of its management etc). With surefire stuff such as the (...) bet on AI (happening for so many years already by the way), going the sectoral route is more risk-proof to me. I would compare it to going with GDXJ (junior gold miners ETF) as opposed to trying to pick the company that might or might not have the touted ore quality at hand, in a friendly foreign jurisdiction or not, if you know what I mean...
That's still valid, and I would add that sector rotation strategies are a very valid, yet a bit demanding approach. Different sectors experience their heyday during different stages of the bull market. For example, materials, energy and industrials are the first ones to dust themselves off the bear market bottoms. Or, financials tend to perform better during the latter stages of the bull market in general. But given the current bull run and corona repercussions, I expect financials and real estate to underperform for quite a while longer. Coming back to your question, picking a renowned sectoral ETF is better from the diversification point of view that putting all eggs into a single stock basket.
Summary
Summing up, stocks have traded with a bullish bias until the Trump corona test result sunk in. Is that a game changer? Unlikely, and as neither smallcaps nor emerging markets are breaking down, I look for strength to eventually reassert itself in the 500-strong sector as well. Yes, I look for this bear raid to fail in short order.
Trading position (short-term; S&P 500 futures; our opinion): long positions (100% position size) with stop-loss at 3140 and initial upside target at 3550 are justified from the risk-reward perspective.
Thank you.
Monica Kingsley
Stock Trading Strategist
Sunshine Profits: Analysis. Care. Profits.
